Singapore's largest bank picks 3 airlines to buy — one with 'the cheapest recovery play'

Published Mon, Aug 2 20217:30 PM EDTUpdated Mon, Aug 2 20218:20 PM EDT

Southeast Asia's largest lender DBS expects international travel to restart gradually toward the end of 2021 and named its top airlines in Asia — and one has the "the cheapest recovery play." Domestic travel has picked up in countries that have successfully contained the virus. However, international air passenger volumes remain "significantly depressed" as extensive restrictions are still in places where the delta variant is raging, according to DBS analysts in a report last week. "Airlines in Asia Pacific continue to be the worst hit, with international RPK still down by 94.3% compared to pre-crisis levels," the analysts said. We still expect 2022 to be the year of redemption for travel among key markets that we track, as the world continues to make strides in mass vaccination. DBS analysts RPK, or revenue-passenger-kilometers, is an airline industry metric that calculates the number of kilometers traveled by paying passengers. It is an indicator of demand for air travel. The Singapore bank slashed net profit estimates across the board for airlines due to "the protracted easing of international travel restrictions" and the recent spike in crude prices. DBS picks 3 China airlines Still, airlines in China are set to outperform their peers for two reasons: the presence of a substantial domestic market and a "remarkable pace" of vaccination in the country, according to the bank. Steep correction in the share prices of the Chinese carriers also presents "a good buying opportunity," it added. Here are three Chinese airlines to buy, according to DBS. All of them are listed in Hong Kong. China Eastern Airlines : With a "buy" rating and a lowered price target from 5 Hong Kong dollars ($0.64) to 4.40 Hong Kong dollars per share, China Eastern Airlines is the bank's preferred pick. The stock has a 56% upside from Monday's close and is "the cheapest recovery play" among its Chinese peers, DBS said. It also has "the largest share of key regional routes." China Southern Airlines : DBS reiterated a "buy" call for the stock because of its "leading position in the domestic market" and greater cost efficiency. The bank lowered the price target from 6.90 Hong Kong dollars to 6.40 Hong Kong dollars — a 56% upside from Monday's close. Air China : DBS lowered the price target from 7.60 Hong Kong dollars to 6.80 Hong Kong dollars and maintained a "buy" rating. That a 38% upside from Monday's close. The bank said the risk-to-reward ratio for Chinese airlines is more favorable at the moment because they "fulfil all the criteria for a brisk recovery." Other regional carriers DBS analysts said they remain cautious on Singapore's flagship carrier Singapore Airlines and Hong Kong's Cathay Pacific as reopening of borders will be choppy and measured. Singapore Airlines : DBS upgraded SIA to "hold" — which means a total return of between -10% to +10% over 12 months. It was previously rated "fully valued," implying the analysts expected negative total return of more than 10% over 12 months. The bank also set a new price target of 4.90 Singapore dollars ($3.62) per share — up from 3.60 Singapore dollars. The bank said SIA's recovery prospects are "already baked" into its share price and it is set to benefit from the city-state's rapid vaccination rate. Cathay Pacific : The bank maintained its "hold" rating on the Hong Kong flagship carrier and kept its price target unchanged at 6.30 Hong Kong dollars a share. Unlike China, neither Singapore nor Hong Kong have a domestic travel market and their carriers rely entirely on international travel. Travel outlook The air travel industry has been one of the hardest-hit sectors since the pandemic began last year. Between flight suspensions and border closures, airlines have lost billions in revenue and were forced to lay off thousands of workers to cut costs. While the spread of Covid variants could continue to stifle near-term travel, sustained vaccination progress will gradually help countries to open up, according to DBS. However, skepticism toward the shots remain a risk, the analysts said. "We still expect 2022 to be the year of redemption for travel among key markets that we track, as the world continues to make strides in mass vaccination," they said.

People walk toward the departure hall at Changi International Airport in Singapore on March 15, 2021.

Roslan Rahman | AFP | Getty Images

Southeast Asia's largest lender DBS expects international travel to restart gradually toward the end of 2021 and named its top airlines in Asia — and one has the "the cheapest recovery play."